Are French workers paid too much?

France’s jobs market is too ‘rigid’ and must be reformed to boost growth and employment, Brussels and international agencies like the OECD* endlessly repeat, and hawkish PM Valls has been only too happy to oblige. But new evidence challenges this assertion, shows French economist Arnaud Parienty.

The “structural reforms” that Brussels asks France mainly consist in making labor markets more flexible. In particular, it is often argued that wages should have fallen with the crisis of 2008 and they have not. This argument was developed in a note by the Economic Analysis Council (EAC) in 2013 by Philippe Askénazy, Antoine Bozio and Cecilia Garcia-Penalosa. They invoke theories of wage efficiency, developed in the United States about thirty years ago within the framework of neoclassical explanations of unemployment. But a recent study by France’s official statistics agency, INSEE, the author Michel Husson says the opposite: wages in France are stagnant or decreasing. So are French workers’ wages flexible or not?

The CAE study looked at private sector gross wages, net wages (after tax, social security contributions) and wages taking account changes in the structure of the workforce. This latter focus was necessary as the average salary takes into account all categories of employees. However, the proportion of “high” wages (middle managers and professionals) has increased, while the proportion of ‘low’ wages (blue collar and lower skilled salaried employees) has fallen. The average wage thus increases because of the change in the structure of employment. But it may be that individual wages, at the same time, remain unchanged or fall.

Suppose, for simplicity, that out the total workforce 20% are middle managers and professionals paid 4,000 Euros net per month and 80% are blue collar and lower skilled salaried employees, paid 1,200 Euros. Five years later, the workforce comprised 40% of the former earning 4,000 Euros and 60% of the latter paid 1,000 Euros. In the first case, the average is 4,000 x 20% + 1,200 x 80% = 1,760 Euros. In the second case, the average salary is 4,000 x 40% + 1,000 x 60% = 2,200 Euros. The average rises, but wages actually fall due to these changes to the composition of the labour market. The EAC study concludes that these structural effects amount to a quarter of the increase in wages, or 0.6% per year between 2009 and 2010. The INSEE study found, for the same years, a structural effect of 1% in 2009 and 0.5% in 2010, but taking into account changes in the structure of the workforce wages stagnated.

In 2012, net wages fell by 0.4%, and dropped 1.3% after structural effects. Weages fell in all occupational categories. Michel Husson concluded that wages in France are flexible enough – they reacted to the decline of activity in 2008-2009 – and so it is unjustified to recommend economic policies the lower the cost of labur. It would be interesting to know what do the authors of authors of the EAC report think of the INSEE study, as it shows that they are wrong. And if this true, why? Steve Keen shows in his book that economists have a habit of simply ignoring data that is contrary to their reasoning. It would be a shame if this were so this time, especially as the CAE authors are not neoclassical ideologues. In some respects the INSEE report makes surprising conclusions. For the last known year, 2012 compared to 2011, the INSEE study shows that wages of managers (-0.8%) and technicians (-1.1%) decreased more than those of blue collar workers and employees (-0.4%). Those in full time work in the bottom 10%, saw wages fall by just 0.1%, while the median drop is 0.6%. Yet at the same time, the unemployment rate is much higher and faster expanding for workers, especially unskilled workers, than for middle managers and professionals. Less than 4% of managers are unemployed, which is very close to full employment, against nearly 21% of unskilled workers.

How so? One could conclude that the lowest wages are those that have dropped less because of the statutory minimum wage, while it is these same workers who should have seen their wages drop the most because there is high unemployment in these categories reveals weak demand for unskilled labour. What does it mean? That wages in France are not so rigid as has been made out, except the lowest incomes. It may therefore seem useful to reduce social contributions on low wages in periods when growth slows.

However, it is possible that this effect will be very limited. Indeed, what characterizes a crisis is the uncertainty of the future. In this context, employers’ first reaction is to stop hiring as they wait to see more clearly the future prospects for their businesses, regardless of such incentives. It is clear that an average decrease of 1% in the lowest wages would not change anything in this wait-and-see behaviour. The real reasons for the unemployment of unskilled workers are slowing growth, but especially the disappearance of activities employing unskilled workers, especially traditional industries such as automotive or textiles. Wage cuts, as shown by the German case, can play a significant role if they are massive (asparagus pickers paid 3 or 4 euros per hour, for example), that is to say, morally and politically unacceptable.